- Many Australian and New Zealand startups eventually expand internationally — particularly to the US — to access larger markets, more customers and international talent pools.
- To overcome the challenges of establishing operations in a distant location, founders rely on having boots on the ground in the new locale to transfer the company’s culture and access resources from formal and informal networks.
- Expanding internationally requires substantial capital, particularly in the domestic currency. While there is no rule of thumb for how much a company should raise before expanding abroad, founders should allow a sufficient buffer to weather unexpected costs and challenges.
The story of innovation in Australia and New Zealand (ANZ) over the past decade is one of growth. For instance, Australian venture capital (VC) investment has increased markedly over the past four years, with Q1 2022’s peak of A$3.6 billion representing a 12.0x increase from Q1 2018 (refer to Australian VC investment graph below). Growth in New Zealand VC has also been strong with investment of NZ$258 million in 2021, up 2.2x from 2018’s NZ$117 million, according to a 2022 report and data provided by New Zealand Growth Capital Partners.
Rather than rely on foreign VC, ANZ has developed homegrown VC firms, critical to a vibrant investment ecosystem. In fact, senior investment professionals at the most active Aussie and Kiwi VC firms have the international experience necessary to build connections abroad and facilitate foreign expansion.
Further, many of these investors were once founders themselves, symbolizing the recycling of talent within the ANZ ecosystems. Australian firm OIF Ventures raised A$100 million in just 24 hours in September 2022, according to Financial Review. This demonstrates the power of the domestic talent pool as well as efficacy of investment from successful Aussie founders.
Notes: PitchBook data as of July 31, 2022. Most active Australian VCs represent those who raised more than five funds or US$500 million through fund structures between 2019 and 2022. Most active New Zealand VCs are those who raised more than US$100 million through fund structures between 2019 and 2022. Firms must have a primary location in Australia or New Zealand to be included.
This growing innovation ecosystem has put several cities in the region on the map of global innovation hotspots. In a 2022 report by research firm Startup Genome, for instance, Sydney and Melbourne ranked among the top 40 startup ecosystems globally. Meanwhile, despite its relatively small population, New Zealand’s startup ecosystem ranked among the top 40 emerging areas, bolstered by its strong talent pool. The region is also home to an increasing number of unicorns (in domestic currency), such as Sydney’s Canva, Auckland’s Lodestone Energy and Melbourne’s Airwallex and Culture Amp (Source: PitchBook).
Part of this success can be attributed to world-class resources that these cities have developed. For instance, trade organizations like Austrade, Trade and Investment Queensland (TIQ), Investment NSW and New Zealand Trade and Enterprise (NZTE), among others, have been critical in helping Aussie and Kiwi founders expand to the US with dedicated landing pad programs that provide crucial guides for expansion and introductions to experts. Similarly, local and national governments have directly encouraged and incubated a domestic innovation ecosystem through community organizations. For example, LaunchVic, headquartered in Melbourne, is the center of the Victorian startup community, playing host to events, accelerators and other programs aimed at facilitating founder success in the state.
The necessity of international expansion
Even with these robust and growing ecosystems, the ANZ economy remains comparably small. Australia and New Zealand together are ranked 10th in gross domestic product (GDP), similar in size to the large, developed economies of Canada and South Korea. With a combined GDP of US$1.9 trillion, ANZ has less than 10% of the output of the US, a popular expansion market for the region’s startups.
Notes: Australia and New Zealand are counted together for this analysis. The data represents GDP in current prices (USD) for 2021 and is sourced from the International Monetary Fund.
Consumer spending in the country is high on a per-capita basis, providing consumer-focused startups with a strong market of potential customers. Australia is third among countries in terms of per-capita consumer spend, and New Zealand is not far behind at number nine. However, the relatively small populations of ANZ — combined, approximately 30 million people — limit the total addressable domestic markets.
Notes: This data represents the final consumption expenditure per capita by households and nonprofit institutions serving households in constant 2015 US dollars. The most recent annual data point between 2019 and 2021 is presented for each country; countries without data between 2019 and 2022 are excluded. The data is sourced from the World Bank Development Indicator series.
Perhaps more important to startups and VC investors are exit opportunities. Because of their smaller economies, ANZ's IPO and M&A activity are lower than in larger regions. In 2021 in the US, there were 319 IPOs on the Nasdaq and 433 on the NYSE, representing approximately 14% of IPOs globally, according to the World Federation of Exchanges’ Annual Statistics Guide. In ANZ, there were only 206 IPOs on the ASX and 11 on the NZX in 2021 — just 4% of IPOs globally.
ANZ exit markets allow even the countries’ largest companies to exit through M&A or IPO, thus enabling those that hold ownership in VC-backed startups to sell their interests. For instance, Judo Bank, one of Australia’s growing number of unicorns, went public on the ASX in November 2021, following several rounds of funding, starting with an early-stage VC round in 2018 (Source: PitchBook). In New Zealand, My Food Bag went public on the NZX in March 2021 in one of the country’s largest recent IPOs (Source: PitchBook).
In terms of M&A, Australia and New Zealand together ranked fourth over the past year in terms of transaction volume by country. The volume of M&As involving US-based companies was nearly 10x higher.
Notes: This data represents the total transaction value in USD (billions) for all transactions in each country between August 1, 2021, and July 31, 2022, based on the location of the target company’s headquarters. Transactions without deal values are excluded. The data is sourced from S&P Capital IQ.
Australia and New Zealand combined punch above their weight, ranking among the top countries in terms of GDP, consumer spending and M&A transaction volume. Still, the relatively small market sizes of these two countries prompt many Aussie and Kiwi founders to explore international expansion after proving product-market fit at home, often to bigger markets such as the US.
The US was a natural next step for us based on our existing traction with US customers.
Ky Hacker, CRO, FileInvite
Why expand internationally: The founder perspective
For many founders, it’s not a question of whether to expand internationally but when.
“The reality of being an Australian company is you can’t build a truly big business with only local customers and networks,” says Kim Teo, CEO and co-founder of Mr Yum, a mobile ordering, payments and marketing platform for the hospitality and entertainment industry.
In fact, many founders choose to open offices near client clusters. For example, Auckland-based document and data collection startup FileInvite quickly outgrew its domestic market.
“We were a global business from day one,” explains Chief Revenue Officer Ky Hacker. “After expanding from New Zealand to Australia, we began to look at where there was a larger addressable market. The US was a natural next step for us based on our existing traction with US customers, our market fit and the bigger opportunity in the country.”
Talent constraints are another motivation for expansion. Michael De Nil, CEO and co-founder of Morse Micro, a Sydney-based developer of next-generation Wi-Fi chips, notes, “We knew from day one that we would need to expand internationally. Morse Micro needs a large number of engineers with very specific technical skills across the microchip design and development space,” De Nil explained. “While we can recruit some to come to Australia, some understandably don’t want to uproot their families.”
In addition to opening offices in areas with high concentrations of talent, Morse Micro — which raised a A$140 million series B round in September — also formed a training program whereby a cohort of local computer science graduates rotate through the company over a six-month period. Many receive a full-time offer from the company at the end of the program.
However, international expansion is not right for every company, with startups in some verticals more likely than others to launch operations outside ANZ.
Fitting the profile: Which startups expand
SVB’s proprietary data on ANZ startups with US operations sheds light on the types of companies that are most likely to move into the US market. We compared a cohort of Aussie and Kiwi startups that expanded into the US with the domestic Australian startup market.
In terms of industry representation, the largest group of businesses that expanded into the US were enterprise software companies. In fact, most companies that expanded into the US were in software-focused sectors as varied as healthcare, e-commerce and marketplace enablement. The domestic market, meanwhile, has a much greater representation of fintech companies compared to other industries. This could reflect the relative difficulty of bringing innovative financial technologies to the highly regulated US market already entrenched with existing players.
Notes: US industry representation is based on the percentage of companies in each industry, using a cohort of 174 ANZ companies that expanded into the US. Domestic representation is based on the percentage of deals completed in H2 2021 and H1 2022 in Australia, using data provided by Cut Through Venture.
Finding the right industry niche in the US is important. “Founders often underestimate the scale of the US,” notes FileInvite’s Hacker. “You need to niche down geographically and, critically, vertically. In Australia, we focused on the mortgage lending space, but in the US there was already a lot of noise. So, we had to find the market fit and ultimately saw significantly more traction in commercial lending, SBA lending and community banking, where there was more open space.”
Even with the right market fit, founders rely on a host of resources to enable their international expansion — from informal networks of fellow founders and VCs to more formal organizations, such as law firms, accounting firms and banks.
Resources and reserves: The founder perspective
Establishing operations in a new, distant location poses several challenges. Among the most difficult is transferring the company’s ethos and culture to the new area. According to founders, having boots on the ground is also critical.
“One of the ways we maintain culture is by seeding new offices or markets with existing team members from other parts of the business. These first team members are so important in imparting our company mantras on the ground,” explains Mr Yum’s Kim Teo.
Expanding to the US also requires substantial capital. “The US is expensive when you’re in a New Zealand dollar-based business,” says FileInvite’s Hacker. “While we are selling USD-based contracts, talent is still expensive in a domestic-currency basis, and startups need enough capital to validate the US market properly.” However, when it comes to how much companies should raise before expanding abroad, there is no solid rule of thumb. Instead, Hacker explains that companies should be mindful that “those that expand too early and with too little capital will struggle to execute in any new market if they don’t have enough dry powder to commit.”
Morse Micro’s De Nil agrees: “The US is far more complex than Australia to have a company, and founders can get hit with hefty fines if they run afoul of complicated tax rules, for example. If startups expand too early and don’t have a financial buffer, these kinds of things can kill the company.”
Learning from others’ mistakes and accepting advice on the best partners and service providers can be helpful in avoiding some of the same stumbling blocks.
De Nil notes, “Resources can be found in both informal groups of founders and funders as well as through more formal avenues, like banks and law firms.” For example, plugging into the strong network of Aussie and Kiwi founders can be helpful for practical advice on establishing the company in the US. “They can also support you to find the key people on the ground to open doors.”
Thank you to Kim Teo of Mr Yum, Michael De Nil of Morse Micro and Ky Hacker of File Invite for sharing their expertise and providing helpful background for this article. Thank you as well to Chris Gillings of Cut Through Venture for providing data.
For more information on how SVB can be a partner to your startup, check out our guide, The essentials for expanding to the US, or contact Sara Rona, Head of Australia & New Zealand and Global Channel Partnerships across ANZ, LatAm, India and MENA.